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Economics Micro > Business objectives > Flashcards

Business objectives Flashcards

1
Q

Total revenue formula

A

TR = P x Q

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2
Q

Average revenue formula

A

AR = TR/Q

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3
Q

Average revenue curve

A

Downwards sloping
D = AR

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4
Q

Marginal revenue

A

The additional revenue a firm makes by selling one extra unit

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5
Q

Total revenue curve

A

Increases as MR is positive, decreases as soon as MR is negative.

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6
Q

Total revenue

A

The area of a chosen point of the AR curve, under the demand curve

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7
Q

What happens to TR when demand is elastic and there is an increase in price?

A

Demand decreases by a more than proportional increase in price. TR decreases

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8
Q

How does PED change as price decreases along the AR curve?

A

Elastic -> unitary elastic -> inelastic

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9
Q

Where is revenue maximised?
And why?

A

MC = 0
- Firms may also maximise revenue in order to increase output and benefit from economies of scale
- In short term firms may use this strategy to eliminate the competition as the price is lower than profit maximisation point

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10
Q

Short run

A

When at least one factor of production is fixed

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11
Q

Long run

A

When all factors are variable, there are only variable costs

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12
Q

Variable costs

A

Exists in the LR and SR. Vary with output. E.g wages

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13
Q

Fixed costs

A
  • Only in short run
  • Don’t vary with output. E.g capital, salaries
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14
Q

Total cost formula

A

TC = TVC + TFC

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15
Q

Average fixed cost formula

A

AFC = TFC/Q

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16
Q

Marginal cost

A

Additional cost of selling one extra unit

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17
Q

Marginal cost formula

A

MC = Change in TC/Change in quantity

18
Q

What happens to marginal cost when productivity increases?

A

Marginal cost decreases

19
Q

Diminishing marginal returns

A

In the short run as more FOP are employed, initially productivity will increase but productivity will eventually diminish

20
Q

Average variable cost formula

A

AVC = TVC/Q

21
Q

Average total cost formula

A

ATC = TC/Q or AVC + AFC

22
Q

What are the 6 types of internal economies of scale?

A
  1. purchasing economies
  2. technical economies
  3. managerial economies
  4. marketing economies
  5. financial economies
  6. risk bearing economies
23
Q

Purchasing economies

A

Larger firms are able to negotiate much lower prices through bulk buying. Reduce their LRAC

24
Q

Technical economies

A

Larger firms can invest on specialist capital to increase productivity

25
Q

Managerial economies

A

Larger firms can employ specialist staff to increase productivity, therefore decreasing LRAC

26
Q

Marketing economies

A

Larger companies can pay for advertising by spreading the costs over units sold

27
Q

Financial economies

A

Larger firms can borrow for lower interest rates as the company is less risky

28
Q

Risk-bearing economies

A

Larger firms can use revenue to diversify. If one fails, having other companies reduce the risk of failure

29
Q

Reasons for internal diseconomies of scale

A
  1. alienation
  2. bureaucracy
  3. communication
30
Q

Alienation

A

Alienation reduces employees motivation which decreases productivity

31
Q

Bureaucracy

A

They have to hire more managers and people that do filing. When too much money is spent on this. Increases LRAc

32
Q

Communication

A

Larger firms have slow communication. If the manager wants to receive a message has to go through many people before reaching the intended recipient

33
Q

What is the minimum efficient scale? (MES)

A

When a firm first reaches its lowest LRAC

34
Q

External economies of scale

A

Reductions in the LRAC as industries output increases.

35
Q

Show do we show external economies of scale on the LRAC curve?

A

The entire LRAC curve shifts down

36
Q

Profit formula

A

P = TR -TC

37
Q

Normal revenue

A

TR = TC (covering opportunity costs )

38
Q

Supernormal profit

A

TR > TC

39
Q

Satisficing

A

It involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit

40
Q

Minimum efficient scale

A
  • the lowest point on a cost curve at which a company can produce its product at a competitive price
  • at the MES point the company can achieve the economies of scale necessary for it to compete efficiently in the industry x
41
Q

Shut down point

A
  • P< AVC
  • when variable costs cannot be covered
42
Q

Break even point

A
  • TC = TR
  • after all costs are paid for there is neither profit nor loss

Economics Micro (10 decks)

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